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Monday, 8 April 2013

NBN: Hysterical Claims, Unbelievable Consultants

There is no B3 Bomber! What B3 bomber? I told you, there is no B3 bomber. ["Wag the Dog"]

The Hysterical Media has whipped itself into a frenzy over Mr Turnbull's claims that the current NBN Co rollout will be $45 billion over-budget, with "funding required (cost to the taxpayer)" of $94 billion.

How ways are these hysterical claims false and baseless? Below is the detail of a previous summary.

The real problem here is that I feel I have to write anything:

How did Senator Conroy allow the situation to develop where such outlandish claims couldn't be instantly batted away with a simple and restrained, "Look at the NBN Co website for the real details and analysis."? That failure is real and pressing and a Labor "own goal".

Funding ain't Taxes, Sol

The first problem is the confusion over "funding". From my reading of the NBN Co papers, it is being fully funded off balance sheet, in the same way that you don't treat the loan for your mortgage the price of your home as an income or expense, because one day you can sell the asset, and probably make a good profit.

The Government is borrowing the money for NBN Co to build its project and will sell it as a profitable business. By 2033, the forecast is NBN Co will have repaid all its debts and interest. If this were a family, they'd have paid off their mortgage in 20 years. A fine effort. Taxpayers only get to pay the interest on the money borrowed, and then, only for a time. NBN Co expects to be earning significant income by the time it has passed 50% of premises. It's "peak" capital funding from the Government is well shy of the total forecast cost of $37.4 billion. More like $30 billion.

Why would the Government borrow money, then give it to NBN Co? Because Australia, the Federal Government, has a "AAA" credit rating and gets the absolute cheapest rates around, much better than NBN Co could get directly. That's a good deal and smart business.The way Labor setup the business and funding is the cheapest it can be done. Plus they've given NBN Co very modest targets for "Internal Rate of Return", currently 7.1%, not the 14% Telstra would target.

This matters, as 60-75% of the costs of a Telecommunications company are in financing or depreciation: cheaper money == cheaper services.If the business had to make double the profit to hit the same financial targets as Telstra, guess what? Their services would be more expensive again...

We're getting a bargain the way Labor has organised the finances and ownership. If Telstra, Optus or any of the private Telcos had done this, services would cost at least 30%-50% more, just because of financing and margins and that would reduce sales, pushing charges even higher.

$45 billion more... that's not $94 billion, not even close.

How did Turnbull's consultants get from $37.4 billion to $94 billion?

By claiming the NBN Co project will end up over-running by 4 years and somehow that translates into an extra $45 billion. But the maths only works if you start from $49 billion, which nobody, not even the Murdoch press, has ever claimed.

That's not smoke-and-mirrors, it's pure, baseless fabrication.

A $45 billion over-run

From the way the Coalition speaks, and seemingly the way they've had others analyse the NBN Co project, it's one big amorphous mass of 12.2M premises.

Naively, you start at the first house on the first street and do an install. 12 million times later, you're done. The time taken is the same for each house.

Bulk premises roll-out starting 2014. Many teams working in parallel, all over the country.

This part of the roll-out will scale-up well and will be able to be managed and controlled tightly.

Earlier delays may be overcome by employing more teams, but not attracting a premium because it scales well.

The largest and longest project is the full-fibre rollout, and it's in multiple phases.

But the Coalition and its advisors seem to conflate and confuse all the NBN Co projects with just this one project. Completely ridiculous.

The major portion of the $37.4 billion total budget does go to the Fibre rollout, but far from all of it.

My reading of the NBN Co budget is ~$28.5 billion, with around $9 billion going towards "Fixed Wireless", Satellite and design/preparation work. Either money that's been spent (sunk costs) or that the Coalition has said it will continue with, and has never publicly challenged.

The only part of the project that can vary much is the $1,340/premise connection cost, or $16.5 billion.

The $2 billion in common infrastructure will be well advanced with locked-in contracts. The worst that can happen is IT systems schedule blowouts and late delivery of some facilities. This work would've been tightly specified in Phase 1 and the Design Project: they'd have let fixed-priced contracts with significant penalty clauses and even some early completion bonuses.

For the Turnbull & advisors assertion to be correct and for there to be a $45 billion cost over-run, then it can only be because the $16.5 billion roll-out has turned into a $61.5 billion project.

Really?!?!?

After all that preparation work, pilot studies, trials, audits, checking of estimates and risk management, they've got it wrong by 270%. Really?!??!

Just because two investment banks say that their experience in, I presume, commercial rollouts, is $3,500-$4,000/premise, doesn't mean that the carefully prepared and checked NBN Co project plan is wrong. They are not doing this rollout by private Telco rules, it can easily be that much cheaper!

Even if the NBN Co experts got it wrong by 50% and their contracts had more holes than swiss-cheese, allowing their contractors to get away with (economic) murder, that could only be an over-run of $8 billion.

But NBN Co have never achieved a target and are running way, way behind in the rollout. The schedule has blown out, that's got to cost more.

Fixed-price contracts allow the contractee to limit their exposure to schedule over-runs. In large infrastructure projects, you'd expect penalty clauses as well for avoidable delays.

NBN Co. admitted last month that only 190,000 to 220,000 homes would be passed by its cable by July this year, well under the 341,000 target in its corporate plan and 1.3 million predicted by Julia Gillard in December 2010.

“What we're seeing again from Stephen Conroy is the use of a completely meaningless metric designed to exaggerate the progress of the NBN and hide the fact that in terms of houses actually passed, Labor will be lucky to get to around 15 per cent of its original target of passing 1.3 million houses by June,” Mr Turnbull said.

The current run-rate is around 30% below the 2012 Company Plan estimates. You'll note that this work is being done solely by private-sector contractors, not NBN Co. If

Via some weird "economic magic, Turnbull and his advisors have translated a schedule blow-out into a cost blow-out. This could only happen if NBN Co accepted all the risk and only wrote "Time and Materials" contracts. Which is completely farcical...

Assuming the project run-rate was 30% low, forcing the schedule to over-run 4 years (2014 to 2025, not 2021), and that contractors were not paid on outcomes, but inputs, then the most the budget could over-run is 30% of $16.5 billion, or $5 billion, around one-tenth of the figure Turnbull et al have dreamed up.

But it gets worse... The labour component of the fibre build cost would be at most 2/3 (66%) or $11 billion and a 30% blowout in schedule would only cost NBN Co $3.5 billion, if they were fully liable.

Summary:

The Coalition want us to believe that a very carefully constructed, rigorously checked and highly scrutinised plan is out by $45 billion at least. Somehow, that scales up a $37.4 billion project to $94 billion.

The NBN Fibre project is only $28.4 billion in total, of this only $16.5 billion is for the construction of the network (Telstra gets a sizeable payout per line disconnected) and of that, only $11 billion is variable costs (labour and equipment) that could be affected by the schedule.

Even if the roll-out went 100% over budget, that's ~$10 billion. What accounts for the other $35 billion? It's a complete nonsense.

I think the Coalition either got this for free, and its worth every penny if it was, or it should ask for its money back, these grossed-up figures are so far fetched as to be unbelievable.